Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

New Glass-Steagall Act Key to Ending Too Big to Fail Banks

Politics / Market Regulation Jul 19, 2013 - 01:22 PM GMT

By: Money_Morning

Politics

Garrett Baldwin writes: Last week, four senators that include Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.) introduced a bill to reinstate the Glass-Steagall Act.

The 21st Century Glass-Steagall Act, as it's called, would bring back many of the provisions of the former law and strengthen language to limit financial speculation by the big banks, reduce risk, and attempt to end "Too Big to Fail" once and for all.


The original legislation, called The Banking Act of 1933 but commonly referred to as Glass-Steagall, was partly repealed by Congress in 1999 and signed into law by President Bill Clinton. But by the time Glass-Steagall was repealed, the law had already been watered down and full of loopholes that left the U.S. economy highly vulnerable to a financial crisis.

Many economists believe that the partial repeal of this law was responsible for the recent financial crisis.

But the reintroduction of a Glass-Steagall law would do one critical thing that should provide comfort to any American.

It would make it impossible for the Big Banks to access FDIC-insured savings and deposits, and then speculate with ordinary Americans' money. In addition, it would aim to end Too Big to Fail and reduce the size of the mega-banks, in essence break them up.

The History of Glass-Steagall Act and its Benefits

Following the stock market Crash of 1929, Congress sought in 1933 to reduce risk in the financial sector.

Four key provisions were central to the Depression-era law. Here is what each of them did for more than 60 years:

  • Section 16 made it illegal for national commercial banks (banks overseen by the Office of the Comptroller of the Currency) from engaging in securities trading. It would be illegal for a company like Bank of America to engage in speculation of commodities and derivatives.
  • Section 20 banned state-chartered or national banks that are Federal Reserve members from being engaging in operations with investment banks that were engaged in securities dealing.
  • Section 21 banned investment banks from accepting deposits. It would be illegal for a company like Goldman Sachs to allow customers to open a savings or checking account.
  • Section 32 made it illegal for Federal Reserve member banks from sharing corporate board members with investment banks.

Sections 20 and 32 are the primary firewalls that many mention when speaking of this law.

From the 1980s until its repeal, numerous loopholes were chiseled out.

As financial institutions became publicl- traded companies, the interest in short-term profits overcame the desire for long-term stability. The creation of exotic securitization products and widespread subprime lending became critical parts of the banking industry's profits from the late 1970s on.

And we know how well that went.

The banks' ability to engage in insurance and credit default swap trading was, at the time, far more controversial than the movement to replace this law. But the emphasis on share prices drove banking leaders to eye Glass-Steagall as a significant limitation on their profit potential using taxpayer insured deposits.

And there was big potential for profits in their line of business.

Commercial banks wanted to be able to take increased risks with the money they had in their vaults, while investment banks, the real risk takers, wanted access to the deposits of traditional banks in order to maximize their profits.

At the time, a number of loopholes were discovered in the law, which corporate lawyers and banks exploited, and the banks increased lobbying to weaken the legislation.

While the impact of the law's repeal is hotly debated among economists, it's hard to argue against one thing: The investment banking culture significantly overtook the conservative models of commercial banking.

A New Firewall

The proposed bill is only 30 pages long and is rather explicit in its language that would reinstate these core provisions and seek to increase oversight of financial instruments like credit default swaps, which were not part of the financial industry in the 1930s.

Re-implementing this famous firewall between the banking divisions would likely lead companies like Citigroup and JPMorgan to spinning off portions of their businesses, and reduce communication between commercial banks and companies that engage in securities trading like investment banks and hedge funds.

The war drums for Glass-Steagall have been booming since the $6 billion-plus loss reported by JPMorgan caused by the trades of the "London Whale" in 2012.

But Glass-Steagall wouldn't have prevented this loss, as the problems actually occurred on the commercial side of the bank. In addition, companies that collapsed in 2008, Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, and the American International Group (AIG) would not have been regulated by Glass-Steagall, as they have no commercial banking arms to regulate.

While Glass-Steagall would reduce companies like Citigroup, JPMorgan, Goldman Sachs, among others from getting "Too Big to Fail," the regulators still need to engage in proper regulation to address vulnerabilities in the derivatives markets.

The Dodd-Frank bill in 2010 was supposed to draw greater attention to the Financial "Weapons of Mass Destruction," as termed by investment legend Warren Buffett.

However, Dodd-Frank has been an abysmal failure, a law essentially written by corporate lobbyists. JPMorgan, which convinced Americans through a robust grassroots movement in 2010 that it was innocent in taking part in the faulty derivatives game, has come out far stronger and better poised to capitalize in the commodity derivatives markets.

Ironically, JPMorgan was named Derivatives House of the Year in 2012 by Risk Awards. The company then proceeded to lose $6 billion on derivatives.

Yet a renewed Glass-Steagall will reduce the influence of investment banking speculation on commercial banking. The bill also should seek to increase bank capital requirements and reduce leverage ratios.

Want to know more about this new Glass-Steagall Act will work? Here's the lowdown on the 21st Century Glass-Steagall

Source :http://moneymorning.com/2013/07/19/new-glass-steagall-act-key-to-ending-too-big-to-fail/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in